The missing intercept: a demand equivalence approach

Author / Creator

Wolf, Christian K

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Online

Summary

I give conditions under which changes in private spending are accommodated in general equilibrium exactly like changes in aggregate fiscal expenditure. Under such demand equivalence, researchers ca...

I give conditions under which changes in private spending are accommodated in general equilibrium exactly like changes in aggregate fiscal expenditure. Under such demand equivalence, researchers can use time series evidence on fiscal multipliers to recover the general equilibrium "missing intercept" of shocks to private spending identified in the cross section. I apply this method to deficit-financed stimulus checks, and find a) a large direct consumption spending response, and b) a fiscal multiplier of one and so a missing intercept close to zero. I also discuss the robustness of this aggregation approach to empirically plausible violations of demand equivalence.

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